USD, EUR, JPY, GBP, CAD, AUD, NZD: Weekly Outlook - Morgan Stanley

The dovish FOMC minutes supports our view that we need to see substantially better economic numbers for the Fed to turn hawkish. With the Atlanta Fed and our in-house GDP tracker indicating signs of the US economy slowing, we think USD still has some downside potential in the near term. Improving Asian data implies China’s GDP numbers this week has limited downside surprise risks, which should support risk appetite and weaken the USD. We watch CPI numbers this week.

The short term outlook appears to be range bound for the EUR but the longer term picture is increasingly looking bearish. DKK rising up against its upper intervention ceiling, sovereign bond spread widening, Brexit risk and signs of increasing populism such like revealed by the Dutch referendum concerning the EU-Ukraine association treaty have limited the EUR upside. Spanish and Italian bond yields marching higher is also another sign of vulnerability in EMU.

JPY: Bullishness Remains. Bullish.

Falling price expectation and underperforming JPY denominated non-sovereign debt assets do not bode well for Abenomics. The JPY is at risk entering a viscous circle breaking higher if the BoJ is not helped by the Fed. Japanese funds seeing foreign investment returns declining because of the stronger JPY may have to increase hedging activities. The Japanese interbank lending market has collapsed under negative rates all declining monetary velocity, JPY positive.

GBP: G10 Underperformer. Bearish

GBP has remained an underperformer in the G10 space, failing to hold on to its gains against the USD unlike the other risk currencies. Concerns about Brexit continue to weigh on the GBP, as investors get increasingly concerned after the Dutch rejected the EU-Ukraine deal in the referendum. GBP volatility is likely to remain high with oil prices staying volatile ahead of the OPEC meeting on April 17th. We focus on CPI and BoE rates decision this week.

CAD: Still Constructive Ahead of BoC. Bullish.

We’ve been constructive on CAD given improving data and the hawkish BoC. However, this week’s very poor trade data raises questions about whether Canada really is turning the quarter. Real non-commodity exports fell 3.5% to a good deal of the previous month’s increases but the trend is still improving. The BoC meets next week where we expect them to maintain a hawkish tone as they update their forecasts to incorporate the better than expected data from 1Q and the federal government’s fiscal stimulus. Therefore, we still like long CAD positions unless we see data deteriorate further.

AUD: Temporary Stability. Neutral.

Better AUD data, rising iron ore prices and a hawkish RBA have support AUD in the last few weeks. However, recent data (retail sales, trade balance, building approvals) all point to a weak 1Q and the RBA included negative language on the AUD in its last statement for the first time since July 2015. We believe data will continue to be weak and like selling AUD on rallies as a higher AUD puts growth at risk and makes an RBA cut more likely.

NZD: Waiting for rallies to sell. Neutral.

We think the NZD still has some upside potential in the near term but would look to sell rallies rather than participate. With Asian data improving, risk appetite needs to be supported for high yielding currencies like NZD should benefit. Dairy prices rose at the last auction so will be watched to see if that forms a new upward trend. We remain bearish on NZD in the medium term due to low inflation expectations and the TWI trading at a 3% premium to the RBNZ’s 2017 forecast.